Stephen Gunnion
6 October 2008
Johannesburg — AFTER a volatile week, which saw share prices on the JSE fall back 8% and the rand slump to its lowest levels in five years, markets are expected to continue to be unsettled this week as investors await more measures to return stability to the global financial system.
News late on Friday that the US House of Representatives voted 263 to 171 for a $700bn rescue package for financial institutions, funded by US taxpayers, would bring some relief, analysts said.
However, more was needed to ease illiquid credit markets, such as a concerted effort by European countries to introduce similar measures and synchronised cuts in interest rates in developed economies.
After the House of Representatives rejection of the bill last Monday led to sharp falls on world markets, the US Senate approved an amended bill on Wednesday, and it was passed by the House on Friday. The bill lets the US government buy toxic assets from institutions. It includes tax breaks and a higher limit on federal bank deposit insurance.
JSE share prices retraced some of their losses to end marginally higher on Friday after US markets opened stronger in anticipation of approval for the plan and news of a $15,1bn merger between US banks Wells Fargo and Wachovia. This overshadowed the biggest fall in US nonfarm employment in more than five years, which analysts said was a sign of a looming US recession.
André Roux, head of fixed income at Investec Asset Management, said the rand was likely to remain under pressure against the dollar.
However, he said this was more a result of dollar strength as US financial institutions moved money back to the US to improve liquidity.
Investors were also becoming more risk averse, Roux said. However, he said the rand's weakness had not been as dramatic as that of other commodity-related currencies, such as the Australian and New Zealand dollars, as it was already weak, and had not benefited as much from the strong rise in commodity prices earlier this year. The dollar had also been undervalued, he said.
Due to the poor global economic outlook, Roux said commodity prices were also likely to remain weak in the short term. He said the markets now expected more to be done than just the $700bn rescue package.
"I think the global outlook has changed, and we need something bigger now. We need generalised (interest) rate reductions around the world to make markets come back significantly from current levels."
Chris Meyer, CEO of RMB Morgan Stanley, said: "I think the focus has shifted a bit from the financial disaster in the near term to the global economic slowdown, which is coming more to the fore globally."
Meyer said US data showed the industrial market in recession. Japan's Tankan confidence index among big car makers and electronics fell last month for the fourth quarter running. There was concern about growth in Europe.
"I think what is causing the sell-off in the market right now, led by resources stocks, is that people are now worried about the synchronised global slowdown," Meyer said. The global liquidity crunch would affect most countries, including SA.
While the rescue package for US banks would go a long way towards alleviating problems, Meyer said it was less relevant to the markets now than a week ago.
"I think the markets had already factored in that there would be a package of some sort, but the damage has been done with liquidity being drained from the system," Meyer said.
While a co-ordinated cut in interest rates was not a given due to central bankers' concerns about inflation, it would probably result in a positive reaction from investors, he said.
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